Electricity Rates Predicted to Increase 20 Percent by 2012

InsideINdianaBusiness.com Report

A Purdue University-based study group has published a report that Indiana electricity rates could jump by 20 percent over the next four years to pay for increasing construction and fuel costs. The increased rates would also assist companies in meeting new federal air-quality standards.

The study also predicts that after 2012, rate increases will slow to less than the general inflation rate.

Press Release

West Lafayette, Ind. -- Indiana electricity rates are projected to increase about 20 percent over the next five years because of new federal air-quality standards, coupled with increasing construction and fuel costs.

A report, entitled "Indiana Electricity Projections: The 2007 Forecast," contains projections of the state's energy needs between 2006 and 2025 and was prepared for the Indiana Utility Regulatory Commission (IURC). Analysts presented the report's findings to the state utility commission on Dec. 21.

"The demand for electricity is going to increase, and the prices are going to increase considerably during the early years of the forecasting period," said Douglas Gotham, director of the State Utility Forecasting Group, a state-funded panel of researchers based at Purdue University. "Part of the increase will come from expenses associated with new emissions standards, and another issue is that the costs of construction materials have gone up dramatically in the last couple of years, in some cases doubling for some materials."

The third factor driving up rates will be higher costs for fuel, such as coal and natural gas, used to generate electricity.

A thriving industrial sector also is projected to drive rising demand for electricity later in the 20-year forecasting period.

The forecast was prepared by Gotham; Paul Preckel, a Purdue professor of agricultural economics; and analysts Forrest Holland, Zuwei Yu and David Nderitu.

Among the report's findings is the prediction that by 2012 electricity rates will increase by 20 percent overall, with residential rates rising 22 percent, commercial 20 percent and industrial 19 percent. After 2012, rates are projected to rise at a far slower rate, slightly lower than the general inflation rate, Gotham said.

The forecasting group's previous report, released two years ago, did not project substantial increases in electricity rates because the new clean-air mandates had not been finalized and the increases in the cost of construction materials had not occurred at the time of its release, Gotham said.

Electricity use in the state is expected to increase 11 percent during the next five years, from the present 113,000 gigawatt hours, to nearly 126,000 gigawatt hours, rising 2.46 percent annually over the entire 20-year period and adding up to about a 55 percent increase by 2025. One gigawatt hour is enough to serve the annual needs of about 90 average-size Indiana homes.

"This annual increase is a little higher than what we've forecast in the past, and it's due primarily to a more robust economic forecast," Gotham said.

Electricity demand is expected to begin increasing at a greater rate around 2014, primarily driven by a projected thriving industrial sector.

"The economic projections over the entire 20 years are more robust than what we were looking at two years ago when we prepared the previous report," Gotham said. "Electricity prices will increase primarily during the early years of the 20-year forecast. This increase in prices will help to keep electricity use from growing because customers use less electricity when the price goes up. Then, during the later years when the price starts to level off, that's when we expect to really see the growth in demand."

The projections are done on a statewide basis. Some utilities would be expected to experience lower growth than others based on the economic and geographic factors that they face. Similarly, price increases will vary among utilities, he said.

The panel used a system of sophisticated mathematical models to predict future trends for residential, commercial and industrial power users in the state. The increased demand for electricity could be met by building new plants, purchasing power from other generators on the network or increasing efforts to conserve electricity, Gotham said.

The report looked at three categories of electricity provided to users: baseload power, which is produced by plants that generate electricity throughout the day; peaking power, which is produced by plants providing electricity only during times of heaviest demand, such as the hottest periods on summer days; and cycling power, which is produced by plants providing power for uses that are between peaking and baseload demand.

The group projects a need for 3,220 megawatts of additional resources by 2012, of which 1,290 megawatts is for baseload power, 600 megawatts is for peaking power and 1,330 megawatts is for cycling power. An Indiana utility, Duke Energy, recently received regulatory commission approval to construct a new $2 billion electric power plant near Edwardsport, while another has proposed purchasing two non-utility generators, or so-called merchant plants, which are built and operated by independent sources instead of utility companies.

Combined, these facilities would add about 1,500 megawatts, meeting about half of the needed additional resources projected for 2012. The added electricity from those facilities was not included in the report because the proposals were still pending before the state when the report was prepared, Gotham said.

"Also, most of the capacity from two wind farms under development in Benton County was not included since only a small portion of their output is contractually obligated to Indiana utilities," he said.

Clean-air standards from the U.S. Environmental Protection Agency will require Indiana utilities to increase the amount of equipment for reducing sulfur dioxide, mercury and nitrogen oxide emissions from coal-burning power plants.

The new environmental rules will likely hit Indiana harder than some other states because of its heavy reliance on coal for energy, Gotham said.

More than 94 percent of the electricity generated in the state is from coal-fired power plants. As of 2006, Indiana ranked fourth in the United States in the amount of nitrogen oxides emitted annually and third in sulfur dioxide.

The more stringent emissions requirements are contained in two new rules from the EPA. The Clean Air Interstate Rule mandates reductions in nitrogen oxides in 2009 and sulfur dioxide in 2010. The rule's second phase of reductions starts in 2015 for both nitrogen oxides and sulfur dioxides.

The Clean Air Mercury Rule is projected to reduce mercury emissions from power plants by about 70 percent by 2018. The same pollution-control equipment installed for sulfur dioxide and nitrogen oxides also will reduce mercury emissions, but further measures will be needed eventually to entirely meet the mandated mercury reductions.

"So phase one of the mercury rule, which goes into effect in 2010, does not require additional pollution controls," Gotham said. "But phase two, which goes into effect in 2018, will require steps to specifically remove mercury from emissions."

Sulfur dioxide and nitrogen oxides cause acid rain. Nitrogen oxides also react with other compounds and sunlight to form ozone, which is hazardous to people and plant life. The new EPA rule calls for reducing sulfur dioxide and nitrogen oxide emissions by about 56 percent and 68 percent, respectively.

Mercury contained in coal is released into the atmosphere when coal is burned. Airborne mercury is deposited on the Earth's surface and collects in waterways. Microorganisms convert mercury into a highly toxic form, called methylmercury, which moves up the food chain and builds up in the tissues of certain types of fish and shellfish.

The Purdue-based group prepares the reports about every two years to predict Indiana's future electricity requirements and the need for new generating capacity. The previous report was released in 2005.

A copy of the report is available on the Internet at http://www.purdue.edu/dp/energy/SUFG/

The forecasting group does not make recommendations. The studies are done in accordance with a state law enacted in 1985 to provide the state regulatory commission with an impartial projection of electricity consumption and peak demand. That information is used in determining whether the need exists for additional power plants. This is the 11th full report compiled by the group.

The forecasting group is housed within Purdue's Energy Center, which is part of the university's Discovery Park.